2025 (5) TMI 894 - HC - Income Tax

Revision u/s 263 - initiation of penalty proceedings under an incorrect section - AO initiated penalty proceedings u/s 271(1)(c) and the same para the penalty proceedings u/s 271AAB of the Act were also initiated by issuance of notice u/s 274 of the Act. Whether initiation of penalty proceedings under two sections by A.O. by recording satisfaction for one section makes the order erroneous and prejudicial to interest of revenue and revisional authority can direct A.O. to initiate penalty proceedings under other section after recording satisfaction? HELD THAT - Section 271 of the Act stipulates that the penalty may be imposed by the officers mentioned in section being satisfied during the course of proceedings that the ingredients of one of the clause (a) to (d) exist in the case. The five judges Bench of the Supreme Court in the case of S.V. Angidi Chettfar 1962 (1) TMI 10 - SUPREME COURT dealing with Section 28 of the Indian Income Tax Act 1922 (which is para-materia to Section 271 of the Act) held that satisfaction of the officer has to be during course of the proceedings and it cannot be arrived at after the conclusion of proceedings. In the present case the A.O. recorded satisfaction for initiating penalty proceedings under Section 271AAB of the Act and initiated proceedings both under 271AAB and 271(1)(c) of the Act. The penalty proceedings under Section 271(1)(c) of the Act were vitiated for non recording of the satisfaction by the A.O. during the course of the assessment proceedings. It is a case of non recording of satisfaction u/s 271(1)(c) of the Act and not case of wrong mentioning of section as A.O. initiated proceedings under both the sections but recorded satisfaction for one section. Revisional order directing A.O. to initiate penalty proceedings u/s 271(1)(c) of the Act by recording independent satisfaction is not justified as reasons cannot be recorded after culmination of proceedings. The order of the tribunal quashing the order of the revisional authority is upheld. Decided against revenue.

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

(i) Whether the Income Tax Appellate Tribunal (ITAT) erred in law in quashing the revisional order passed under Section 263 of the Income Tax Act, 1961;

(ii) Whether the ITAT erred in law by treating the initiation of penalty proceedings under an incorrect section of the Income Tax Act as equivalent to non-initiation of penalty proceedings;

(iii) Whether penalty proceedings must necessarily be initiated in the assessment order itself and whether incorrect initiation of penalty proceedings by the Assessing Officer (A.O.) renders the assessment order erroneous and prejudicial to the interests of revenue.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legality of quashing the revisional order under Section 263

Relevant legal framework and precedents: Section 263 of the Income Tax Act empowers the Commissioner to revise an order if it is erroneous and prejudicial to the interests of revenue. The Court referred extensively to judicial precedents, including a five-judge Supreme Court decision in Commissioner of Income Tax, Madras vs. S.V. Angidi Chettfar, which emphasized that satisfaction for penalty must be recorded during the course of proceedings and not post facto. Additional precedents from various High Courts and the Supreme Court reiterated that assessment and penalty proceedings are independent and that failure to record satisfaction for penalty during assessment does not necessarily render the assessment order erroneous.

Court's interpretation and reasoning: The Court found that the revisional authority directed the A.O. to initiate penalty proceedings under Section 271(1)(c) after the assessment proceedings had concluded, without the A.O. having recorded independent satisfaction during the assessment. The Court held that satisfaction cannot be recorded after the conclusion of proceedings and that the revisional authority's order was thus not justified.

Key evidence and findings: The A.O. had recorded satisfaction for initiating penalty proceedings under Section 271AAB but not under Section 271(1)(c). Despite this, penalty notices were issued under both sections. The revisional authority sought to rectify this by directing initiation of penalty proceedings under Section 271(1)(c) after recording satisfaction, which the Court found impermissible.

Application of law to facts: The Court applied the principle that satisfaction for penalty must be recorded during proceedings and cannot be created after their conclusion. Since the A.O. did not record satisfaction under Section 271(1)(c) during assessment, the revisional order directing initiation of penalty under that section was invalid.

Treatment of competing arguments: The appellant argued that penalty proceedings were initiated under Section 271(1)(c) in the assessment order and that Section 271AAB was not applicable for the assessment year. The respondent contended no satisfaction was recorded for penalty under Section 271(1)(c). The Court sided with the respondent, noting the absence of recorded satisfaction under Section 271(1)(c).

Conclusions: The revisional order was rightly quashed by the ITAT, and the Court upheld this, finding no error in the ITAT's decision.

Issue 2: Whether initiation of penalty proceedings under two sections with satisfaction recorded for only one renders the order erroneous and prejudicial

Relevant legal framework and precedents: Section 271(1) requires the A.O. to be satisfied about concealment or furnishing inaccurate particulars to initiate penalty proceedings. The Supreme Court in Commissioner of Income Tax vs. Jai Laxmi Rice Mills held that satisfaction recorded under one penalty provision cannot be the basis for initiating penalty proceedings under a different section. The Court also relied on the principle that penalty proceedings are distinct from assessment proceedings.

Court's interpretation and reasoning: The Court held that recording satisfaction under Section 271AAB alone does not validate initiation of penalty proceedings under Section 271(1)(c). The initiation of penalty proceedings under Section 271(1)(c) without recorded satisfaction renders those proceedings vitiated. However, this is a case of non-recording of satisfaction rather than incorrect mention of the section.

Key evidence and findings: The A.O. issued penalty notices under both Sections 271AAB and 271(1)(c), but satisfaction was recorded only for Section 271AAB in the assessment order. The Court emphasized that satisfaction must be specific to the section under which penalty is sought.

Application of law to facts: The Court applied the principle that satisfaction must be specific and contemporaneous to the penalty provision invoked. Since satisfaction was absent for Section 271(1)(c), the initiation under this section was invalid.

Treatment of competing arguments: The appellant argued that initiation under Section 271(1)(c) was valid as it was mentioned in the assessment order. The Court rejected this, emphasizing the necessity of recorded satisfaction.

Conclusions: Initiation of penalty proceedings under Section 271(1)(c) without recorded satisfaction renders such proceedings invalid and cannot be cured by revisional directions after the fact.

Issue 3: Whether penalty proceedings must be initiated in the assessment order and effect of incorrect initiation

Relevant legal framework and precedents: The Court reviewed the statutory provisions and judicial pronouncements that assessment and penalty proceedings are independent and that recording of satisfaction is a prerequisite to penalty imposition. The Delhi High Court and other High Courts have held that failure to record satisfaction in the assessment order does not make the order erroneous and prejudicial to revenue.

Court's interpretation and reasoning: The Court held that penalty proceedings need not be initiated strictly within the assessment order but satisfaction must be recorded during the course of assessment proceedings. Incorrect initiation of penalty proceedings without recorded satisfaction does not render the assessment order erroneous or prejudicial to revenue.

Key evidence and findings: The A.O. initiated penalty proceedings under two sections but recorded satisfaction only under one. The revisional authority treated this as non-initiation under the other section and found the assessment order erroneous. The Court disagreed with this approach.

Application of law to facts: The Court applied the principle that satisfaction cannot be recorded post assessment and that penalty proceedings are independent. Hence, the revisional authority's direction to initiate penalty proceedings afresh was impermissible.

Treatment of competing arguments: The appellant contended that penalty proceedings should have been initiated in the assessment order and failure to do so rendered the order erroneous. The Court rejected this, relying on authoritative precedents.

Conclusions: The assessment order was not erroneous or prejudicial to revenue merely because penalty proceedings under Section 271(1)(c) were not initiated with recorded satisfaction. The revisional authority's order was rightly quashed.

3. SIGNIFICANT HOLDINGS

The Court preserved the following crucial legal reasoning verbatim:

"The power to impose penalty under Section 28 depends upon satisfaction of the Income Tax Officer in the course of the proceedings under the Act; it cannot be exercised if he is not satisfied about the existence of conditions specified in clauses (a), (b) or (c) before the proceedings are concluded. The proceedings to levy penalty has, however, not to be commenced by the Income Tax Officer before the completion of assessment proceedings by the Income Tax Officer. Satisfaction before conclusion of the proceedings under the Act, and not the issue of the notice or initiation of any step for imposing penalty is a condition for the exercise of the jurisdiction."

The core principles established include:

(i) Satisfaction of the Assessing Officer that the conditions for penalty under Section 271(1) exist must be recorded during the course of assessment proceedings;

(ii) Assessment and penalty proceedings are independent;

(iii) Initiation of penalty proceedings without recorded satisfaction during assessment is invalid;

(iv) Revisional authorities cannot direct recording of satisfaction after the conclusion of proceedings;

(v) Penalty proceedings initiated under a section for which no satisfaction was recorded are vitiated;

(vi) Failure to record satisfaction for penalty under a particular section does not render the assessment order erroneous or prejudicial to revenue.

Final determinations on each issue were:

1. The ITAT did not err in quashing the revisional order under Section 263.

2. Initiation of penalty proceedings without recorded satisfaction under the relevant section is invalid and cannot be cured by revisional directions.

3. Penalty proceedings need not be initiated within the assessment order itself, but satisfaction must be recorded during proceedings; failure to do so does not make the assessment order erroneous or prejudicial.

Accordingly, the appeals were dismissed, and the substantial questions of law were answered against the revenue.

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